Is Your Budget Process Crippling Your Organizational Agility?

Intro field:

As more organizations strive to increase their agility and to promote cross-functional collaboration, the budgeting process, unfortunately is often overlooked. This process in and of itself is a management system, one that can either support or stymie delivering organizational goals in an integrated and agile way.

If your budget process allocates funds to the different functions of the organization, your entire organization will suffer. Money will disappear into functions without yielding the results that the business expects or needs to thrive. Morale and motivation often plunge as teams cope with pre-allocated funds based upon insufficient planning data and imbalanced resource allocation because the available resources of people and money don’t support the pipeline of work. Additionally, this type of budgeting system doesn’t enable an organization to pivot according to market demand. Sound familiar?

Despite its long tradition and management’s good intentions, a functionally driven budget approach causes problems. Typically, organizations allocate money to functions based on the previous year’s performance or modelled on best practices. In today’s complex, dynamic environment, companies need to take a more strategic, flexible approach to funding that addresses current conditions. Otherwise, funding will remain clogged up in yesterday’s priorities, hindering—rather than helping—your business’s growth.

For too many organizations, this problem is endemic. You might have tried (or you might be considering) restructuring to address it. But a restructure will not address the root cause of the issue.

To change your operations, you need to change how you allocate resources. Your budgeting system needs to encourage work across the organization, not inhibit it. In this article, we’ll explore two different approaches to funding allocation—one we see frequently in struggling organizations and an agile alternative that will drive your cross-functional goals.

(Dys)Functional Funding: An Outdated Approach

We see a lot of businesses that fund projects based on functions or programs.[1] At surface level, it makes sense to give each function and program the resources they need to drive their part of the organization’s success. Look closer, however, and you notice the cracks that quickly form into silos and gaps. In part driven by outdated accountability system, money gets locked into allocated segments as individual leaders hoard their budgets—even if they don’t have a specific use for the money—rather than supporting the needs of the larger organization, “just in case.”

Consider the example of a business that makes vacuum cleaners, with different divisions managing different product lines–one is cordless, another eco-friendly. Each vertical unit sets its goals and determines the resources they need, receiving a budget that reflects the prior year’s usage—often trimmed by a mandate to cut costs.

Both product lines drive the organization’s overall growth. But the leaders of each area are accountable for their own profit and loss, which can lead to tunnel vision, especially when centralized functions support both product lines.

Last year, the cordless vacuum division had a particularly aggressive strategy, while the eco-friendly program didn’t spend as much. Consequently, the cordless program receives more funding than its current strategy actually requires. But when the market turns and demand for eco-friendly models rises, the company doesn’t have the means to divert funding to the eco-friendly line. The funding has already been siloed in its cordless counterpart.

The programs could share resources, of course. But voluntary redistribution rarely happens; leaders end up squabbling over who pays for what. They fail to realize—and accountability systems fail to reflect—that, while they’re accountable for their program’s budget, the funding does not belong to them; it exists to support the organization as a whole.

Now let’s imagine that the vacuum cleaner company restructures to fix this problem. They move all their funding for technical resources into a centralized function that is responsible for allocation across all programs. This shift, the company thinks, will reduce how many resources are needed and facilitate resource sharing.

In reality, the new function has its own initiatives to set best practices, develop capacity, update technology, etc.—all for the larger goal of improving allocation efficiency. But wait. The funding still remains with the individual product lines. The only funding assigned to the centralized group is earmarked for resources. How will they support their initiatives? Wrestle funding away from the various divisions? But how much money does this new group need? And should each unit cede the same portion of its budget, either as a dollar amount or as a percentage? The restructure didn’t solve anything because the root cause wasn’t the structure; it was twofold: the budgeting process and the accountability system.

Businesses frequently assume that creating a centralized function to distribute resources across all programs will ensure fair allocation of funds. But different programs require different resource allocation at different times, and adhering to best practices can mire an organization in an inflexible model that fails to support any goal—whether immediate, long-term, or evolutionary.

Agile Matrix Funding: A Flexible Alternative

If your organization is struggling with its funding, you’re likely working with a one-dimensional budget process. But your business is two-dimensional, and your funding needs to support both the horizontal (strategic, operational) and vertical (functional) dimensions. Enter agile matrix funding.

The first step is taking the management and allocation of funding away from functions and programs. Instead, shift that responsibility to cross-functional steering councils that are accountable for key business segments. These horizontal governance teams determine what they need to achieve their goals, and they set up a portfolio of work, allowing their respective teams to create the operational plans. Projects and initiatives—which allow organizations to execute strategy—are funded in the moment, as they receive approval. Key stakeholders manage those resources jointly. Together, they make tradeoffs that ultimately serve the best interests of the organization, not their respective areas of accountability, based on a clear set of shared priorities.

Individual functions know how many resources they have. If these groups know what they need to accomplish in a specific time frame, they can plan their resources accordingly. For example, product development groups may need more resources one year, but post-launch, that funding may be re-allocated to other operations and initiatives.

Too often, funding occurs before planning, and too few resources are committed to the work. Despite mandates to “make it happen,” work stops when money (and capacity) runs out, both everyday processes and strategic projects suffer. Agile matrix funding eliminates this disconnect between allocated budget and actual resource requirements. There needs to be funding available to develop capability and capacity, as well as to run processes and to deliver projects and initiatives. To simplify budget management, funding related to capability and capacity and to running day-to-day processes should be separated from the funding related to projects and initiatives, with these horizontal endeavors funded dynamically, as needed. This separation allows organizations to fund strategic efforts and eliminates mindless directives to slash budgets across the board by a fixed percent.

If either funding or available capacity runs out, one of two things can happen with agile matrix funding. Either the work on a particular project can be put on hold until resources become available, or a dynamic shift can be made to continue supporting it. The steering council is accountable for assessing the situation and deciding together what tradeoffs to make to move forward. This methodology allows the organization to make adjustments aligned to its strategy, rather than letting money stagnate in functions and slow growth.

Next Steps

To support growth, your budget process is another key management system that needs to align all business segments to deliver the organizational strategy. Every part must be integrated and focused on optimizing the entire organization, not individual parts. This won’t happen if leaders’ accountability encourages them to put the needs of their respective functions or programs above the organization’s overall success. Additionally, changing your structure won’t help since leaders remain crippled by an outdated budgeting process that doesn’t support horizontal operation of the organization.

While you might need to update the budgetary and project cost management software you’re using, you definitely need to change attitudes and accountability. Most importantly, you need a steering council of key stakeholders for each cross-functional segment to make unbiased, proactive decisions together that benefit the organization as a whole.

The Matrix Management Institute offers training to achieve this shift in thinking and to help organizations attain agile matrix funding. Our How to Run a Matrix program provides senior leaders the support to start thinking two-dimensionally about funding. For project leaders, our Project Leadership training provides tools to create better estimates, improving the system’s ability to make good funding decisions.

If you’re considering restructuring to solve your funding or resourcing problems, pause and ask yourself if you’re using the full potential of your matrix. Take our free one-minute matrix assessment to find out.

[1] Governments and nonprofits face an additional layer of complexity when funding is based on specific programs.

As the Managing Director of the International Matrix Management Institute, Cathy helps organizations and practitioners adopt the skills and methods they need to succeed in today’s complex, dynamic environment. She is a Matrix Management 2.0™ Master Consultant and the author of several books on matrix management, including her most recent publication, Managing Projects in a Matrix. She is a key contributor to the Matrix Management 2.0™ Body of Knowledge, co-developer of the Matrix Management 2.0™ organizational operating system, and a lead developer for the company.